The Return of Bitcoins

The Return of Bitcoins

Virtual Currency Makes A Comeback

At the beginning of 2015, the prospects for the virtual currency Bitcoin looked grim. Bitcoin's value had plunged from a peak value of $1,240 in December 2013 to a low of $177.28 on January 14, 2015. Around ten months earlier, security and stability fears were heightened after the largest Bitcoin exchange, Mt. Gox, collapsed from within and filed for bankruptcy. They revealed that approximately 850,000 Bitcoins (worth $473 million at that time) had been "lost" and presumed stolen.

Meanwhile, the dark side of Bitcoin's use was in the news thanks to the trial of Ross Ulbricht, the mastermind of the Silk Road website. Silk Road was well known to be a useful facilitator for Bitcoin transactions involving illegal activities, and the trial of Ulbricht was certain to bring those issues back into the spotlight.

Since that time, Bitcoin has made a bit of a comeback. As of this writing, the exchange rate is $439.12 per Bitcoin, more than twice its January low. Exchanges have moved beyond the Mt. Gox debacle, and the government ended up auctioning Ulbricht's Bitcoin stash — legitimizing it to a certain extent.

Gil Luria of Wedbush Securities believes that Bitcoin's time is near, saying, "We believe Bitcoin and its associated blockchain technology have the potential to disrupt the existing financial infrastructure over the next several years." Luria notes that monthly Bitcoin transactions have quadrupled from 1 million in October 2012 to 4 million in October 2015.

The blockchain technology is key to both the strengths and weaknesses of Bitcoin as a currency. The blockchain is essentially a huge third-party accounting ledger where all transactions regarding Bitcoins are logged. Transactions are immediate and irreversible. Since they cannot be changed, the blockchain creates a de facto tracking mechanism for Bitcoins without a high-maintenance cost.

Other asset-based entities are interested in the blockchain, including the NASDAQ. They are looking at a similar ledger to track the securities of non-public companies. Banks are also showing interest in blockchain technology.

Bitcoin has another interesting aspect in that it is inherently capped in supply. The system is arranged so "miners" can only create new Bitcoins at an asymptotically decreasing rate that will result in a peak of around 21 million Bitcoins in existence. After that, Bitcoins can only be transferred or lost through the loss of digital "wallets" and corresponding encryption keys — thus they act more like precious metals than currency.

In addition, there is no central authority to alter the money supply as the Federal Reserve does with greenbacks. That lack of a centralized authority makes some potential users nervous and produces resistance to Bitcoin adoption, especially when its inherent volatility is added to the mix. Realistically, volatility should be no surprise at this stage. Bitcoin is essentially a start-up currency with only around $6 billion in collective value compared to the trillions of dollars in currencies.

A significant number of retailers are now accepting Bitcoin, and ultimately that is what will either push it into mainstream acceptance or leave it as a sideline within the currency markets. As long as Bitcoin exists, it will always be useful as a simple way to move money in or out of countries as necessary. Luria suggests that Chinese regulatory changes and increases in Chinese Bitcoin activity are part of the reason for the recent rally — but Bitcoin has a long way to go before it becomes as commonplace as cash, credit and debit cards, or other methods of payment and investment.

The whole concept of Bitcoin is so embedded in virtual reality... the fact that there isn't a central authority to manage the money supply, and that it is currently capped, don't really make this an attractive option for me.